— by George Leong, B. Comm.
The weather is getting hotter, but the markets are cool. Based on what we have been seeing, the stock markets are devoid of any enthusiasm at this time after a dismal report from the influential World Bank downgrading its global GDP forecast in 2009 to a 2.9% contraction. This was not what traders wanted to hear and, in fact, optimism towards economic recovery later in 2009 had been driving the selling.
But there was some optimism last week after the U.S. GDP for the first quarter fell 5.5%, which, while bad, was better than expected, although it remains worrisome. Durable Goods Orders for May were stronger than expected and pointed to economic renewal. The existing home sales report saw growth, but home prices fell by 16.8% year-over-year, which erodes home wealth and hampers consumer confidence and spending. As I have often said, we need to see a strengthening in home prices before consumers buy big-ticket and non-essential items. This has yet to happen, and it will impact stocks.
So, here we are with several of the major market indices sitting below the breakout levels (DOW: 8,400; and S&P 500: 900-950). The NASDAQ is holding above its breakout of 1,700. The DOW has closed lower in seven of the last eight sessions, with three triple-digit loss days. The key will be the ability of markets to hold.
I do not get a strong sense that markets will be rallying much higher unless we get major positive news on the economy in the U.S. and globally. At the FOMC meeting last week, the Federal Reserve indicated benign inflation with the recession slowing, yet it was not as big a factor for trading as was largely expected. And, until there is a sense of direction, stocks could trade sideways. It seems that markets can go either direction, depending on the news.
The failure of stocks to hold above the breakout levels and key moving averages is negative. The market is nervous, with traders taking profits and hesitant to bid up stocks. The key will be if markets can avoid a major correction. What you want to see is buying emerge following a downtrend. Yet, we also need to see major positive news to entice traders to bid up stocks; otherwise, markets may trade sideways in the near term.
The overall market is moving down. As of June 24, about 65% of all U.S. stocks are above the 200-day moving average, down from 68% a week earlier, but up from 60% a month ago. The same goes for the shorter-term moving averages. For the market sentiment to improve, we need to see the moving average continuing to trend higher.
There is plenty of cash on the sidelines waiting for some early signs of a market turn. Once that happens, there will be a lot of money to be made. The key is that you want to make sure you have cash on hand to buy at some point in the future.
Caution and volatility remain the key characteristics of the current market climate. The current trading is driven by headlines, which makes volatility a major issue.
As an investor and trader, you need to be careful in this market and protect your capital. Taking big risks could wipe out your capital for trading.
As always, I advise you to remain prudent in your trading and avoid any unnecessary risk.